Leading Metrics Used in Evaluation of Cryptocurrencies

11 November 2019 | Updated: 12 November 2019

Due to the reason that cryptocurrencies are in a different asset group than other securities and cannot be evaluated using methods like DCF or DDM, it was necessary to create separate valuation techniques to give investors fundamental tools to analyze cryptocurrencies.

Listed below are four prominent cryptocurrency valuation systems.

Store of Value Thesis
This is a method used in determining a cryptocurrency’s value by evaluating its ability to perform as a store of monetary value.

Let’s use gold as a safe-haven investment as an example. Gold is presently valued at $1,300 / ounce which puts the global gold bullion at $8 trillion. For Bitcoin to displace gold as a store of value, its gross value has to rise to $8 trillion. Considering that the total amount of coins is pegged at 21 million, one BTC will have to be valued at $380,000.
$8 trillion / 21 million BTC = $380,000 per one bitcoin.

Token Velocity
Token velocity is evaluated by dividing the gross amount of transactions of a coin by its average network value.
Token Velocity = Total Transaction Volume / Average Network Value.

Tokens with great velocity are prone to having small utility in their system. Consequently, this method helps investors in identifying platforms’ adoption rate and if it will help the system grow in value in the long haul.

Metcalfe’s Law
For this method, Daily Active Address is used to represent the number of daily connected users and the market cap represents the network’s value. Then, divide the market cap by the DAA² to get the Metcalfe’s Ratio.
MET Ratio = Market Cap/(Daily Active Address)².

This method is an efficient technique for evaluating the progress of a network by analyzing its daily user rate.

Network Value to Transactions Ratio
To evaluate the NVT Ratio for a token, get the market cap and divide by the most recent 24-hour trading volume. The result is what is known as the NVT Ratio. The result can then be utilized to grade one token against another.

NVT Ratio = Market Cap/Transaction Volumes. Consequently, a high NVT Ratio for a token translates into a high hypothetical value.

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Azeez Mustapha

Azeez Mustapha is a trading professional, currency analyst, signals strategist, and funds manager with over ten years of experience within the financial field. As a blogger and finance author, he helps investors understand complex financial concepts, improve their investing skills, and learn how to manage their money.